Rosneft in India: bypassing the sanctions, responding to the Saudis

Photo: press office of the Russian president

The escalating military-political conflict between Russia and the West has overshadowed the Russians’ steps to diversify their foreign economic activities. During the last BRICS Summit in Goa, on Oct 15, 2016, in the presence of Russian President Vladimir Putin and Indian Prime Minister Narendra Modi, Rosneft announced significant investments in India’s energy sector. More specifically, the Russian company has bought a stake in Essar Oil Limited.

The deal was fostered by a decline in commodity prices. A big steel producer (14 million tons of steel and facilities in Asia, Europe, Africa and North America), Essar Group, was in a shaky position due to falling steel prices. The other key product of the group was oil. And here too Essar suffered losses.

As a result, its debt amounted to $13 billion. In order to save the group, its owners Shashi and Ravi Ruia, decided to sell Rosneft 49% of Essar Oil (an oil refinery and a port in Vadinar) but the sum they would get for the stake would not be enough for them to repay their debts. So, they offered Rosneft 74%. Later they had to review that offer for fear of sanctions. In the end, they made up a scheme that would save them from sanctions: they attracted Trafigura Group Pte and Ilya Shcherbovich’s United Capital Partners – both companies are closely related to Rosneft.

As a result, Rosneft has bought 49%, Trafigura Group Pte and United Capital Partners 49%, with the remaining 2% left to minority shareholders. In order to be able to buy a stake in Essar Oil, Trafigura will borrow a loan from the Russian VTB.

Some sources say that afterwards Trafigura may give its stake to Rosneft. So, this all is just a cover for Rosneft to gain full control of the Indian company.

As a bonus, VTB will lend Essar Group $3.9 billion so it can restructure its debt.

Essar is closely related to UK-based financial circles. It still owns Stanlow, an oil refinery producing 12 million tons a year and Dudley, a big steel-rolling company. So, the deal would hardly be finalized unless approved by British financiers. Essar Group’s goal here is to get money for repaying its debts. Rosneft and VTB has undertaken a part of the debts. Essar Oil’s refinery costs $10.9 billion, the port of Vadinar costs $2 billion, but because of the company’s debts, the refinery is estimated at $4.5 billion. Ultimately, Rosneft will pay just $3.5 billion for the assets.

Here we have a reverse side. The Indian companies, ONGC, Oil India and Indian Oil, have bought a 49% stake in Rosneft’s subsidiary, Petrol Complex Lte Ltd and a 49% stake in Kesani Enterprises Company Limited, owned by a consortium of Trafigura and United Capital Partners. The estimated costs of the assets is $10.9 billion. The Indian companies are planning to invest $5.5 billion in oil and gas fields in Siberia. The Indians’ presence in Russia’s oil and gas sector will help the Russians to bypass the western sanctions on the supplies of technologies. So, this whole deal is more like an exchange of assets. Rosneft will invest in India, while Indian companies will invest in Russia.

Rosneft’s purchase has become the biggest ever investment for India and the all-time big capital export deal for Russia. Over the last 16 years, the Russians have invested just $1.2 billion in India. During the same time, India received $96 billion from Mauritius-based offshores and $46 billion and $23 billion from offshores in Singapore and the UK, respectively.

The oil refinery in Vadinar refines 9% of all oil in India or almost 20 million tons a year. This is the second biggest private oil refinery in that country. It has first-class technologies. Besides the refinery and the port, Rosneft has bought 2,700 filling stations. By 2020 the Russians are planning to enlarge the refinery’s output to 45 million tons year and to increase the number of filling stations to 5,000. They will keep Essar’s brand for their retail sales in India. The only facility that is yet outside the deal is the 1,010 MW power plant, which supplies energy to the refinery. But shortly it will also be included in the stake.

One more concerned party here is Venezuela. The point is that the Vadinar oil refinery refines low-quality oil from Venezuela and the Middle East. In Dec 2015, Rosneft and Essar Oil agreed on supply of 10 million tons of crude a year for 10 years. In July 2016, Rosneft signed a number of contracts with Venezuela worth a total of $20 billion. Some of the contracts concern reciprocal oil and oil product deliveries. So, it is obvious that Rosneft will use the Vadinar facility for refining Venezuelan oil. In Venezuela, the Russian company has stakes in five oil extraction projects with estimated reserves of 20.5 billion tons. The supply of Venezuelan oil to India will not affect Rosneft’s market in Europe.

Today, India is one of the fastest growing economies in the world. And its energy needs are also growing. This year India has become the third biggest oil consumer in the world after China and the United States. India is also one of the fastest-growing energy markets in the world and will be so till 2040 at shortest. So, its oil demand will also be growing. In the race for the Indian assets, Rosneft has outrun investors from Saudi Arabia and Iran. So, we can say that this deal has become a symmetric response to the Saudis’ attempts to enter the European market.

As a conclusion we can say that this deal has several aspects – both economic and political:

- It has proved that Rosneft is a first-class transnational corporation, a partner to the British financial center.

- It will enhance India’s energy security and will enlarge Russia’s presence in the Indian market. Rosneft has proved its ability to diversify its foreign economic activities bypassing the western sanctions.

- It will strengthen the economic and political cooperation between Russia and India.

- It will support the oil sector of Venezuela, a country that is suffering from strong political and economic pressures from the United States.